Financial Products Series: Options

The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the eighth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:

Shares

Structured Products

Cash

Current Accounts

Savings Accounts

Annuities

Certificate of deposit

Options

Treasury Bills

Bonds

Tracker funds

Credit

If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Options

Options are the ultimate investment tool if you want total freedom with your investments. They allow for a lot of flexibility in terms of the investors preference for risk, reward, liquidity and patience. Options allow those that invest in them to be as speculative or strategic as they like.

Much like CFD trading, an option is a binding contract that states that the investor can buy or sell an underlying asset (e.g. foreign exchange, stock indicies, property prices etc) at a particular price on or before a certain state previously agreed upon in the contract. If you let the expiration date pass then the option becomes worthless and you lose the money used to pay for the option

Options are some of the most complicated financial products that I shall be covering in this series and are definitely the most risky. Counter to that risk are huge scope for huge profits. Due to the high levels of risk I would urge the vast majority of investors to steer clear and those who do fully understand them to only use risk capital that they can afford to lose.

Advantage

There is scope for big returns, that could potentially be multiple times bigger than the capital invested

You aren't required to have any particular minimum level of capital required, but you should only use what you can afford to lose

Disadvantages

There is scope for big loses

High levels of risk

None of the money is covered by the Government or any other financial body

Most options trading platforms will charge a commission

Overall conclusion

This financial product is not for the majority of people, and is in many circles considered outright gambling, but nonetheless people should know about them as it is one of the main way a lot of hedge funds and corporations make such huge profits.

Score: 5Advice: Steer clear. I've had an experience with a similar product and my feelings are that unless you're a professional with top of the range statistical modelling software then this product is not for you.

Readers, I can't think that anyone will disagree with my last piece of advice but feel free to criticize or simply agree in the comments box below. Has anyone else had a good/ bad experience with options and has a lesson to share?

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